Senstar Technologies Ltd (SNT) 2019 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Magal's First Quarter 2019 Results Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

You should have all received by now the company's press release.

If you have not received it, please contact Magal's Investor Relations team at GK Investor and Public Relations at 1 (646) 688-3559 or view it in the News section of the company's website, www.magalsecurity.com.

I would now like to hand over the call to Mr. Kenny Green of GK Investor Relations.

Mr. Green, would you like to begin?

Thank you, operator.

Welcome to Magal's First Quarter 2019 Conference Call.

I would like to welcome all of you to this conference call, and thank Magal's management for hosting this call.

With us on the line today are Mr. Dror Sharon, CEO of Magal; and Mr. Kobi Vinokur, CFO.

Dror will summarize some key highlights, followed by Kobi who will review Magal's financial performance of the quarter.

We will then open the call for the question-and-answer session.

Before we start, I'd like to point out that this conference call may contain projections or other forward-looking statements regarding future events or the future performance of the company.

These statements are only predictions, and Magal cannot guarantee that they will, in fact, occur.

Magal does not assume any obligation to update that information.

Actual events or results may differ materially from those projected, including as a result of changing market trends, reduced demands and the competitive nature of the security systems industry as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission.

In addition, during the course of this conference call, we will describe certain non-GAAP financial measures, which should be considered in addition to and not in lieu of comparable GAAP financial measures.

Please note that in our press release, we have reconciled our non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements.

You can also refer to our website at www.magalsecurity.com for the most directly comparable financial measures and related reconciliations.

And with that, I would now like to hand the call over to Dror.

Dror, please go ahead.

Thank you, Kenny.

I'd like to welcome all of you to our conference call, and thank you for joining us today.

I'm pleased with our start to 2019.

We reported a strong first quarter revenue level, which is up 23% versus Q1 last year.

A 1/5 of our revenues in the quarter were of recurring nature and the element of our strategy is to grow this portion of business.

Our operating expenses were at $8.5 million level, back down from last year fourth quarter, which includes some nonrecurring expenses.

This allows us to bring an improved bottom line versus the prior quarter.

We also reported an EBITDA of $1 million.

We ended the quarter with $52.8 million, almost $53 million in net cash and no debt.

This high level of cash is more than we need to ongoing working capital and our goal is to leverage this strong cash position for value-adding acquisition.

We're looking to acquire technology, product or new markets leveraging our current business platform to bring increased sales and open up new sales channels.

Our goal is to use our existing platform to others, a larger total market.

Our backlog at the end of the quarter remains at a similar level of that which we have seen for the last few quarters, which means, while we are delivering a high level of revenue, we're also winning business.

While, as you know, it is always difficult at this early stage during the year to get a good handle on revenue outlook for the year, our pattern remains growth and full of potential opportunities.

We are hopeful that we can turn a good portion of our pipeline into additional orders and revenue in the coming quarters.

Together with the whole management team, we have recently developed our strategy ahead for the coming years.

Starting from 2019, the company has been realigned into 2 divisions, that of project and that of product.

Each division has an increased focus on technology and the customers operating in their own go-to-market strategy.

In parallel to operating independently, the division will also corporate across a few strategic verticals while also sharing technologies.

I believe this new structure is more efficient for us allowing us to better share our expertise and technology across our global operations.

It also increases the focus on our customers as well as leveraging our strong technology -- technological capabilities and know-how across the organization.

Starting from this quarter, we will, therefore, be able to add more information to our public releases, which corresponds to the new corporate structure along an improved understanding of how we are progressing.

Kobi will provide these additional details in a few minutes.

Looking more closely at our product, our video management software, the Senstar and Symphony, we continue to release new provisions improving our customers experience with our products and meeting the requirements.

In parallel, we continue investing in research and development, improving the growing of our product lines.

We recently announced the release of our new access control product, which is module incorporated into our VMS product.

Our solution is the first and new apport to the security market.

Our solution includes a wide variety of features, including video management, access control and video analytics.

The new access control abilities has further expanded our addressable market and synergistic with our solutions we already provide to our customers.

In the coming months, the U.S. authorities are starting to test our products in 2 different areas along the southern border of U.S.-Mexico.

We will update you further as things develop.

During the quarter, we announced $1.2 million in electro-optical systems for military vehicles for the Israeli MOD.

It represents some initial fruits of success of the integration of recent acquisition of Esc Baz which extends our technology capabilities in the observation and surveillance market.

We also recently announced a 3-year $6.7 million contract for the maintenance of perimeter intrusion sensor for an international border fence covering over 200 kilometers.

More than just a contract, it is a reminder of how our system are successfully protecting international borders, demonstrating that our system, which are critical components, work very well and trusted in the field.

We do believe that our experience of protecting international borders, including in violating -- including in volatile regions, places us in a good position to provide a sensor for any border globally.

In the project business, our pipeline remains very diverse and is strong and we are bidding on many post opportunities in many regions.

Recently, I just came back from the U.S. following the ISC West security conference in Las Vegas.

We met our existing customers as well as new potential customers demonstrating our latest technologies and gaining many business leads and opportunities.

In summary, we are pleased with our performance in the first quarter.

This is the third year in which we have continually grown our year-over-year revenues in the first quarter.

Our financial position as well as the backlog remains strong and our pipeline is broadened and has many potential opportunities.

And now, I would like to hand over to Kobi to summarize the financial results.

Kobi?

Good luck.

Thanks, Dror.

Revenues for the first quarter of 2019 were $21.2 million, up 23% year-over-year.

The geographic revenue breakdown for the quarter was quite diverse as follows: Israel, 24%; North America, 22%; Latin America, 21%; Europe, 16%; Africa, 6%; Asia and the rest of the world, 11%.

The breakouts between project revenues and product revenues, which include video were 37% product and 63% projects.

Product revenues were $8.1 million, while project revenues were $13.7 million, which after eliminations combined the total of $21.2 million in revenues.

Product revenues grew 14% year-over-year while project revenue grew 21% year-over-year.

First quarter blended gross margins was 42.3% of revenue versus 43.8% last year.

The product gross margins were 61% and the project gross margins were 28% in average, both similar to last year's Q1 margins.

Operating expenses overall were $8.5 million, amounting to 40% of our revenue versus $7.5 million or 44% of our revenue in the first quarter of the last year.

Our current level of operating expenses at around the $8.5 million and $9 million is more indicative of the levels we expect in the coming quarters.

I note that the operating expenses are significantly below those of Q4 last year where there were some onetime expenses including a write-off and provisions for doubtful receivables and in the current levels are now back to more normalized levels.

Operating income was $0.5 million versus $33,000 in the first quarter of 2018.

The EBITDA, which we feel is the most representative measure of the performance of our business in the quarter was $1 million, almost double when compared with EBITDA of $0.5 million in the first quarter of the last year.

We had high financial expenses in the quarter of $0.7 million compared to financial income of $0.1 million in the first quarter of 2018.

In Israel, Magal's financial currency is the Israeli shekel and the vast majority of Magal's cash deposits are held in the U.S. dollars.

Because of sharp currency fluctuations compared with that of prior quarter and appreciation of shekel against the dollar, we recorded a high level of noncash financial expenses in the quarter, but it definitely can fluctuate further.

This led to a net loss in the quarter of $0.6 million or $0.02 per share versus loss of $0.2 million or $0.01 per share in the Q1 last year.

Looking at the balance sheet.

Cash, short-term deposits and restricted deposits as of March 31, 2019 were $52.8 million or $2.29 per share.

This represents a little under half of our market capitalization.

As at December 31, 2018, we had $55 million or $2.38 per share in net cash.

Starting at the beginning of 2019, we adopted the new ASC 842 standard for leases, which requires lessees to recognize leases on balance sheet and disclose key information about leasing arrangements.

The adoption of the standard resulted in a balance sheet recognition of additional lease assets and lease liabilities of approximately $4.5 million upon adoption.

That concludes my remarks.

We would be happy to take your questions now.

Operator?

(Operator Instructions) The first question is from [Thurman Willis].

Yes.

Good quarter.

Could you be a little more specific on the U.S. and Mexican border?

I want to make sure, I have clarification.

Did I understand you to say that you're doing testing there?

It's Dror.

Again, a bunch of questions about the U.S. border.

We are in constant relation and -- with the U.S. government also hired a year ago a consultant that supports us over there, pushing them to put 1 of our -- 1 or 2 of our products in -- as part of the solution once it would been defined.

The current stage is that the U.S. government is going to test few technologies.

One of our technologies is going to be there.

And in the next 1 or 2 months, we'll get to install our product in 2 different areas in the southern border to be tested by the U.S. government.

So this is where we are right now.

As far as we know, currently there is no budget for technology in the southern border, but in parallel, we are pushing them and we are going to test the product and to see that we meet the requirements.

My follow-up question is, I know you had conference in New York with some analysts.

Hoping, we will plan some follow-up meetings in the U.S. to get some fund, buyers in our stock of which we have a low number of institutions involved in our stock.

Can you comment on how those conversations went?

And if they were well taken and if you plan more?

Hi Thurman, this is Kobi.

Yes, indeed, we had non-deal roadshow in April and we had -- and it was quite intense with a series of good meetings with existing and new shareholders.

And we -- basically -- it's our IR strategy to increase the involvement and share of institutional shareholders in our stock.

We would like to increase trading volumes liquidity and we understand that it takes time.

Again, we had good meetings.

We plan to continue in performing such non-deal roadshows during the year.

And we believe that's -- something that's gradually will show in the results of this stock price.

One last follow-up.

Let me make sure, again, understand.

You feel that technology of Magal offers you good promise relative to the U.S. and the Mexican border, is that correct, the feedback, you're getting from the homeland security?

Yes.

One of our product, at least one of them, looks like it's going to be the product of choice, at least the technology is going to be the technology of choice for the U.S. border.

The next question is from Sam Rebotsky of SER Asset Management.

In the financial income, the $731,000 loss compared to $117,000 profit, what is the currency loss in both quarters?

So in Q1, the majority of the loss is attributed to the currency.

As you can see, on our balance sheet, we have the net cash and cash deposit.

So we do earn some positive interest.

So you know, naturally assuming that there is no currency movement, we should actually, at our current situation, record net financial income.

So the majority of the losses is related to the currency.

So $730,000 (sic) [$731,000] is currency loss in the current quarter?

And did you have any gains or losses in the previous year?

In the previous year, we recorded a net gain.

Previous year started -- the U.S. dollar started with -- the trend was appreciation against shekel.

And this year, we see the -- basically, the dollar going back and balancing itself.

Is there any judgment on how the currency will be going this year or...

It's 100 billion-dollar question.

And if you have an answer, let us know as well.

But it's -- yes, currently, at least our -- what we see in the market, the shekel against dollar is more or less constant at the current level, but there are so many speculative and nonspeculative impacts that it's very difficult to know.

Okay.

At the end of the year, you spoke of your highest backlog, your order and all that, what is it look like in this current quarter?

Your sales were up.

The profits were -- because of currency didn't show any profit improvement relative to the sales, what is the backlog and what is the profitability going forward?

So first of all, in terms of the FX impact on the real net revenue and OpEx, because our major operational expenses are incurred in shekels and Canadian dollars, this is where our R&D centers are based and also the corporate.

So actually stronger shekel would result in some favorable impact on OpEx.

So this is from that perspective.

In terms of the backlog, we are -- as mentioned before, we are more or less in the same range of backlog, which is relatively strong and high range of backlog levels that this company experience during the last year's.

So I hope that answers the question.

Okay.

Yes.

And then, you've been talking about acquisitions.

Is there anything that you're looking at that could be closed in the next 6 months to 1 year in the $20 million sales range or...

Currently, the things that we are exploring is a little bit below $10 million.

One of them can be in 1 year more than $20 million, may be, but we're exploring few companies now, it's in the beginning early stages where there's nothing to report yet, but we are putting lot of management attention and effort to find the right acquisitions.

Alright.

Sounds good.

Hopefully you could increase the profits and the stock price, maybe, could go up too.

Okay.

(Operator Instructions) The next question is from [Ronan Raphael].

I want to focus on Magal cash and cash equivalents, which are at the high level of $52.8 million or 46% of the company's value.

Furthermore, Magal's cash flow produces additional $1 million each quarter.

This money has no yield and even causes a financial losses, it doesn't matter what's the reason.

For the long time, we hear in the conference call, the demand is dedicated for a big acquisition, but companies prices are higher so I assume no acquisition is in the near horizon.

I think it's time to reveal Magal's value and support the shareholders and stock prices by using the money to buy back its stock.

So can you comment about this?

Let’s say, we shall start for $10 million each year?

Yes.

Ronan, I do understand the rationale in the question.

We are -- the company is sitting on high cash balances much longer than we planned.

We -- as Dror mentioned, we are -- it's our strategy to grow both organically and inorganically.

And we spend very significant portion of our time and efforts to execute the right acquisition for the company.

It's a constant dilemma between just spending money on any acquisition and making the right acquisition for the company that is aligned with our strategy.

So at the moment, we don't believe as a management that cash buyback or whatever it is would share buyback -- sorry, would actually optimize what we as a company can deliver to our shareholders.

Mentioning our efforts in terms of M&A execution, we operate as a management team as well as through our consultants globally and we do have some interesting opportunities in the pipeline, but again, it's a balance between the right things to do and the right spending and just as an opposite to spending and just spending the money.

The next question is from [Mike Disler].

Just nice job on sales growth in the quarter, year-on-year.

I know the first quarter is always difficult.

Great work.

Kobi, this is just reckon for you.

I missed the last 2 sentences of what you said about the change in accounting regarding the leases and some $4 million, $4.5 million.

Can you just repeat those last 2 sentences in your presentation portion?

Sorry, I just missed that.

Sure.

The implementation of ASC 842 results in basically, increasing the liability part and the asset part on the balance sheet, so from the both sides of the balance sheet.

We basically add around $4.5 million of assets and liabilities.

The amount represents basically the discounted -- on a very high-level explanation, the discounted flow of lease commitments for all our operating lease contracts.

Okay.

Yes.

Basically just to wash, you're just complying with the law, is really what that is?

Exactly.

It's just a bigger balance sheet.

There are no further questions at this time.

Before I ask Mr. Sharon to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available on Magal's website at www.magalsecurity.com.

Mr. Sharon, would you like to make your concluding statement?

Yes, thank you.

On behalf of the management of Magal, I would like to thank you for your continue interest and long-term support of our business.

I look forward to an updating you next quarter.

And all have a good day and nice evening.

Thank you.

Thank you.

This concludes Magal Security Systems First Quarter 2019 Results Conference Call.

Thank you for your participation.

You may go ahead and disconnect.